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Emerging source of oil, not from wells, but sand

Canada's oil sands have been touted for decades as an important source of oil - someday.

That day - spurred by a former Canadian subsidiary of Sunoco Inc. that first commercialized Alberta's Athabasca oil sands in 1967 - is here, at least for Sunoco.

Sunoco's Toledo, Ohio, refinery is increasing its use of synthetic crude oil - made from tar stripped from sand and upgraded - from 70,000 to 100,000 barrels a day. And Joel Maness, the Philadelphia company's senior vice president of refining and supply, would like to use even more.

High oil prices this year have sparked debate about how much crude oil remains to be turned into the fuels and chemicals that have powered the global economy for the last 100 years.

Alberta's estimated 174.4 billion barrels of oil-sands reserves - recognized last year as the second-largest reserve in the world behind Saudi Arabia's 259.4 billion barrels - gives Maness a feeling of confidence.

"There's no such thing as an unlimited resource, but it's an abundant resource," Maness said, referring to the oil sands, which were a key part of Sunoco's reserves when it was an integrated oil company.

J. Howard Pew, a former Sunoco chief executive officer, who evaluated the oil sands for possible development in the late 1940s, was the force behind Sunoco's high-risk effort to develop the oil sands in the 1960s.

In 1995, Sunoco sold its interest in the Canadian subsidiary, Suncor Energy Inc., as part of its plan to exit energy exploration and production. Suncor, based in Calgary, Alberta, kept developing oil sands and now is valued at $15.4 billion, compared with $5.9 billion for its former parent.

But the emergence of oil sands as an increasingly important oil source has not eased the anxiety of industry observers who say the world is fast approaching the era of declining production, which could throw a wrench in the gears of economic growth.

"Nobody doubts that there are vast reserves of Canadian tar sands," said Jim Meyer, director of the Oil Depletion Analysis Centre, a London nonprofit founded to raise public awareness of the oil-supply situation.

This year, oil from tar sands is expected to account for just 1.2 percent of the estimated 83.2 million barrels of oil produced daily.

The problem is, Meyer said, tar cannot be extracted and turned into oil fast enough to make up for the expected fall in conventional oil production.

Many experts predict that oil production will begin tapering off in the next 20 years.

John Felmy, chief economist at the American Petroleum Institute, discounts worries about an imminent production peak. He said that as many as 14 trillion barrels of oil could remain in the ground, counting unconventional sources, such as oil sands and shale oil.

"It's a matter of technology and price," he said.

Improved technologies and generally higher oil prices since 1999 have helped make Alberta's oil sands competitive with conventional sources of oil, said Patricia Lewis, a Suncor spokeswoman.

Getting oil from sand

Producing a barrel of synthetic oil through mining involves using hot water to extract tarlike bitumen from two tons of sand, and then processing the bitumen into high-quality oil that sells for about the same price as the benchmark West Texas Intermediate.

That light, sweet crude benchmark peaked in late October at $55.67 as commodities traders speculated on the potential for major supply disruptions. Yesterday, it was $45.49.

The Canadian National Energy Board estimated this year that oil-sands producers could be profitable at roughly $24 per barrel, a figure that rises along with the price of the natural gas used in the extraction and upgrading process.

Despite high natural-gas prices, oil-sands producers are going all out to expand production. Suncor's board has approved a $3.6 billion project to increase its capacity to 350,000 barrels per day in 2008 from the current level of 220,000 barrels per day.

The Canadian Association of Petroleum Producers predicted that oil-sands production would reach two million barrels per day by 2010 - double the current level. Conventional production in Canada has been declining since 2000, the group said.

Nigeria still vital

While Canada is a growing source for Sunoco, West Africa, particularly Nigeria, remains its largest supplier of crude.

That area of the world, frequently beset by political turmoil, is expected to remain Sunoco's chief crude provider. Many of the new crudes coming onto market from the African interior and from deep-water wells off the coast of Angola are low in sulfur - the kind of oil Sunoco's refineries are designed to process.

The problem with these crudes is that they contain high levels of acid, which can corrode refinery equipment unless special precautions are taken.

Sunoco is doing so at its 330,000-barrel-a-day refinery in South Philadelphia. Since July, regular shipments of high-acid oil from recently developed fields in Chad have been arriving there.

The benefit of the high-acid crudes is that they cost substantially less than the high-quality sweet crudes Sunoco depends on, Maness said. Blending them with other, more expensive crudes boosts profit.

"We spend every single minute of every single day looking for the best combination," said Maness, who has worked more than 30 years in the oil industry.

Dealing with 20 to 30 different kinds of crude oil every month makes things complicated, he said, but "in this particular case, this complication has a lot of rewards."

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